Buffet warns of dim prospects
Warren Buffett (pictured, with US President Barack Obama), chairman and chief executive of Berkshire Hathaway, has said in his annual letter to shareholders that dim prospects lie ahead for the insurance industry, as it faces the dual challenges of unprofitable underwriting and a low interest rate environment. In the letter, he said that the insurance industry’s ‘overall return on tangible equity has for many decades fallen short of the average return realised by American industry, a sorry performance almost certain to continue’. He went on to say: “Insurance earnings are now benefitting from ‘legacy’ bond portfolios that deliver much higher yields than will be available when funds are reinvested during the next few years and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.”
Warren Buffett (pictured, with US President Barack Obama), chairman and chief executive of Berkshire Hathaway, has said in his annual letter to shareholders that dim prospects lie ahead for the insurance industry, as it faces the dual challenges of unprofitable underwriting and a low interest rate environment. In the letter, he said that the insurance industry’s ‘overall return on tangible equity has for many decades fallen short of the average return realised by American industry, a sorry performance almost certain to continue’. He went on to say: “Insurance earnings are now benefitting from ‘legacy’ bond portfolios that deliver much higher yields than will be available when funds are reinvested during the next few years and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.”
Berkshire Hathaway’s fourth quarter 2012 profit increased by 49 per cent, shrugging off the effects of Superstorm Sandy, while its full-year profit rose 45 per cent year-on-year to $14.8 billion. Berkshire Hathaway has been built by Buffet over five decades, and comprises railroad companies, power plants, corporate jet lease and consumer products. The heart of the business, though, is the insurance operation, which includes, among others, Geico Corporation and General Re. Buffet has described the insurance operations within his business as the ‘engine’ driving the company’s expansion, adding: “When such a profit is earned, we enjoy the use of free money and, better yet, get paid for holding it. That’s like your taking out a loan and having the bank pay you interest.” He continued: “Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous in most years that it causes the property casualty industry as a whole to operate at a significant underwriting loss.”